Patrick Legros

Professor of Economics

Publications - regulation

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How university admissions can help integrate secondary schools

Web Article

Fernanda Estevan, Thomas Gall, Patrick Legros, Andrew Newman

Vox column 23 May 2017

In recent years, several US states have introduced college admission policies that reward local rather than global relative performance by guaranteeing admission to students graduating in the top N-percent of their high school. This column examines how these policies affected socioeconomic and ethnic segregation at both the university and high school levels in the state of Texas. While the policies did not replicate the level of diversity in universities seen under earlier affirmative action policies, they did lead to a reduction in the overall level of ethnic segregation in high schools.

Demand-Driven Integration and Divorcement Policy

Traditionally, vertical integration has concerned industrial economists only insofar as it affects market outcomes, particularly prices. This paper considers reverse causality, from prices – and more generally, from demand – to integration in a model of a dynamic oligopoly. If integration is costly but enhances productive efficiency, then a trend of rising prices and increasing integration could be due to growing demand, in which case a divorcement policy of forced divestiture may be counterproductive. Divorcement can only help consumers if it undermines collusion, but then there are dominating policies. We discuss well-known divorcement episodes in retail gasoline and British beer, as well as other evidence, in light of the model.

Audit Competition in Insurance Oligopolies

Peer Reviewed Article

Nicolas Boccard, Patrick Legros

Frontiers of Economics in China, Vol. 12, Issue 3: 371-399

We provide a simple framework for analyzing how competition affects the choice of audit structures in an oligopolistic insurance industry. When the degree of competition increases, fraud increases but the response of the industry in terms of investment in audit quality follows a U-shaped pattern. Following increases in competition the investment in audit quality will decrease if the industry is initially in a low competition regime while it will increase when the industry is in a high competition regime. We use these results to show that firms will benefit from forming a joint audit agency only when the degree of competition is intermediate and that cooperation might improve total welfare we also analyze the effects of contract innovation on the performance of the industry.

Using a comprehensive dataset of all medium and large enterprises in China between 1998 and 2007, we show that industrial policies allocated to competitive sectors or that foster competition in a sector increase productivity growth. We measure competition using the Lerner Index and include as industrial policies subsidies, tax holidays, loans, and tariffs. Measures to foster competition include policies that are more dispersed across firms in a sector or measures that encourage younger and more productive enterprises.

EU Competition Policy in a Global World

Book Chapter

Mathias Dewatripont, Patrick Legros

in

This chapter reviews the forces that have shaped current competition laws and initiatives, in particular those that may ease convergence and cooperation between the US and the EU. Even if convergence is eased when countries are developed, the objectives and the means put in place to attain these objectives may differ across countries. Differences may in turn generate tensions, and therefore shape further developments of the law. Subsequently, this chapter discusses the specific case of state aid control, an EU specificity which has on the one hand helped insure the primacy of competition policy over industrial policy, and has prevented potential wasteful “subsidy wars” between member states. However, on the other hand, this policy has been accused at times of hurting the competitiveness of “European champions.” Finally, the chapter looks at current challenges facing competition policy; focusing first on new developments as far as State Aid control is concerned, namely the State Aid Action Plan, and the special case of aid to innovation. Here, the focus will be on the pros and cons of this policy, namely its potential ability to better address market failures, but also the potential risk of lax enforcement in the name of ‘aid to innovation.’ This danger might be particularly problematic in an era which has witnessed the fast rise to prominence of some emerging-economy powers (like the BRICs) which do not necessarily share the competition-policy philosophy of the EU and US. While the chapter discusses how the common ground reached by these two players could serve as the basis for a global competition policy, it also stresses the potential tensions that could arise from the assertiveness of State interests by public corporations and sovereign funds from these emerging countries.

Public Private Partnerships: Contract Design and Risk Transfer

Book Chapter

Mathias Dewatripont, Patrick Legros

in

This paper critically assesses the implications of contract design and risk transfer on the provision of public services under public-private partnerships (PPPs). Two results stand out. First, the alleged strength of PPPs in delivering infrastructure projects on budget more often than traditional public procurement could be illusory. This is – to put it simply – because there are costs of avoiding cost overruns and, indeed, cost overruns can be viewed as equilibrium phenomena. Second, the use of external (i.e., third-party) finance in PPPs, while bringing discipline to project appraisal and implementation, implies that part of the return on efforts exerted by the private-sector partner accrues to outside investors; this may undo whatever beneficial effects arise from ‘bundling’ the construction and operation of infrastructure projects, which is a hallmark of PPPs.

Quality Incentives in Network Industries: a Case Study and a Model

Book Chapter

Mathias Dewatripont, Patrick Legros

in

We analyze the REIMS II agreement in the European postal industry. The agreement about prices for delivery was accompanied by quality constraints on time for delivery. Data suggest that: (i) quality does improve significantly over time; (ii) but costs (and therefore prices) differ a lot between PPOs and this is not just the result of differences in universal service obligations or quality differences, but rather strongly indicate that some PPOs suffer from a significant lack of efficiency. This is due to the fact that we are very far away from a fully liberalized market with e?ective competition. This leads us to observe that there has not been a serious cost-benefit analysis of the quality incentive scheme, especially since the existing quality incentive is distortive: it is higher the higher the domestic prices/costs (which might come at the expense of cost reduction incentives).

Auditing and Property Rights

In a regulatory setting, audit provides incentives to an agent whose actions affect the future value of an asset. The principal does not observe the audit intensity nor the audit outcome and audit generates soft information. We show that with interim participation constraints, the principal may strictly prefer not to use the information of the agent but to rely only on the information given by the auditor. When this occurs, the auditor obtains property rights on the asset when he reports that the future value of the asset is high, while the agent is compensated by a monetary payment.

Bankruptcy as a Control Device in Economies in Transition

Peer Reviewed Article

Patrick Legros, Janet Mitchell

Journal of Comparative Economics, Volume 20, Issue 1, 265-301

We examine in this paper the design of a liquidation or bankruptcy policy in a partially centralized economy characterized by imperfect information. We employ a two period model to analyze the effects of an optimal liquidation rule on the efficiency of resource allocation and choice of managerial effort when managers have private information about effort and firm productivity. First period investment is used by the regulator to discipline the manager and to extract information. The tradeoff between disciplinary effect and information extraction might be best solved by implementing inefficient liquidation policies inefficiencies in liquidation policies can occur even if the regulator believes that he is facing a given type of firm with probability close to one.

The Economic Consequences of Legislative Oversight: Theory and Evidence from the Medical Profession

Working Paper

Shawn Kantor, Patrick Legros

NBER WP 4281, 1983

This paper provides a positive analysis of how formal, periodic legislative oversight of regulatory agencies can influence market outcomes and the welfare regulated industries. Whereas previous research has focused on the political distinction between passive and active legislative oversight, this paper shows that there exists an important economics difference between the two mechanisms as well. We develop a principal-agent model that describes how a regulatory agent’s incentives are influenced if its actions are publicly scrutinized. our empirical analysis supports our claim that formal oversight leads to measurable economic effects.